High stakes: achieving a sustainable banking sector

By Nicos Panteli

Supervisory authorities constantly remind banks that they need to drastically cut costs

Without a doubt the Covid-19 pandemic has left its mark on all aspects of public life – healthcare, people’s psychology, politics, and most of all the economy.

Over the last 10 to 15 years the global economy has gone through dire straits – starting with the property bubble that burst, along with bad fiscal practices, and later with the coronavirus pandemic.

But let us be realistic. Whether we like it or not, a modern and free economy must be founded on a robust banking sector. Clearly, we cannot have growth or prosperity without a stable and secure financial system. After all, the financial meltdown in our own country did not happen that long ago. We know first-hand that developments in the banking sector directly or indirectly affect us all, because sooner or later they impact the entirety of the economy and society.

Banks currently face a host of challenges. They operate in a hyper-competitive environment, are subject to increased supervision and regulations, and have to deal with legacy issues such as Non-Performing Exposures and cost structures. Banks are coming under mounting pressure from supervisory authorities to revise their business model so as to deal with the aftermath and fallout of the pandemic.

Supervisory authorities constantly point out to banks that they need to drastically cut back on costs. The ratio of cost to revenue stands at approximately 60 per cent to 70 per cent, of which over half relates to payroll. It is a high cost, a recurring cost, and a cost that keeps going up. If banks are to stay on a sustainable growth trajectory, they need to urgently find a formula to rein in their costs.

Strict supervision of the banking system is absolutely necessary. On the one hand, profiteering must be tackled – and here it is the supervisory entities that are responsible, such as the Central Bank and the ECB – and on the other hand, banks must be in a position to drive economic growth.

If labour costs remain high, this will inevitably pose a sustainability issue for banks. Let us take a look at foreign banks or other financial organisations and entities like FinTechs, and see how they are dealing with the issue. No doubt their low labour costs make them more competitive, enabling them to offer customers more attractively-priced products and services.

Ongoing compliance with international standards and practices is key to achieving this goal. There should be no tolerance for outdated or dogmatic mindsets, or for political or personal expediencies.

We need to set aside the distortions of the past, and to muster the courage and determination to take those hard decisions – decisions which in the short run may not sound pleasant, but will in the long run benefit society as a whole.